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Presenting a live 90-minute webinar with interactive Q&A

Asserting Attorney-Client Privilege When

Affiliated Entities’ Interests Diverge Navigating the Complexities of Joint Representation During

Litigation, Spinoffs, Acquisitions or Insolvency

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, APRIL 19, 2016

Charles C. Lemley, Partner, Wiley Rein, Washington, D.C.

Richard A. Simpson, Partner, Wiley Rein, Washington, D.C.

Nicole Audet Richardson, Associate, Wiley Rein, Washington, D.C.

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Attorney-Client Privilege and Affiliated Entities

Navigating the Complexities of Joint Representation During

Litigation, Spinoffs, Acquisitions or Insolvency

These slides are accompanied by an oral presentation and are not to be relied upon for legal advice.

Charles C. Lemley

Richard A. Simpson

Nicole Audet Richardson

Wiley Rein LLP

202.719.7000

April 19, 2016

Presentation Agenda

▪ The Attorney-Client Privilege in the Corporate Context

▪ Attorney-Client Privilege & Corporate Transactions

▪ Preventing Unwanted Outcomes in Transactional Work

▪ Questions . . . and Webinar Conclusion

6

The Attorney-Client Privilege in the Corporate Context

7

Basic Requirements for Attorney-Client Privilege

✓ An attorney;

✓ A current or prospective client;

✓ A communication about a legal matter; and

✓ A reasonable expectation of confidentiality

8

What Happens When “Client” is a Corporation?

▪ Who is the “client” to whom the privilege applies?

▪ What is the scope of that privilege?

▪ Who can waive it?

▪ What if the corporation has affiliates?

▪ Does it matter how closely related the affiliates are?

▪ What factors do courts consider?

▪ Does it matter if they are represented by the same counsel?

9

Attorney-Client Privilege & Corporations

▪ Courts have long recognized that a corporation and its lawyer

may enjoy an attorney-client relationship.

▪ The privilege belongs to the corporate client and it is invoked

by representatives of the corporation.

▪ But, which individuals can speak for the corporate client?

• Control Group Test

• Subject Matter Test

10

The Control Group Test

▪ Focused on the corporate employee’s place in the corporate hierarchy

to determine whether that employee could enjoy the privileged

communications with the corporation’s lawyer.

▪ The privilege belonged only to those who are “in a position to control

or even take a substantial part in a decision about any action which the

corporation may take upon the advice of the attorney, or if [they

are]an authorized member of a body or group which has that

authority.” City of Philadelphia v. Westinghouse Elec. Corp., 210 F.

Supp. 483, 485 (E.D. Pa. 1962).

▪ The United States Supreme Court rejected this test as too restrictive.

See Upjohn.

▪ But it is still recognized in some jurisdictions.

11

Upjohn Company v. United States, 499 U.S. 383 (1981)

▪ The seminal case on the existence of the privilege between corporate

counsel and the employees of a corporation is the Supreme Court's

decision in Upjohn Company v. United States.

▪ The Upjohn Court refused to adopt a bright-line rule for applying the

privilege, observing that “the recognition of a privilege based on a

confidential relationship should be determined on a case-by-case

basis.”

▪ However, the Court made clear that, “[a]s a general rule, a

communication is privileged at least when, as here, an employee or

former employee speaks at the direction of the management with an

attorney regarding conduct or proposed conduct within the scope of

employment.”

12

The Subject Matter Test

▪ Calls for a more broad application of the privilege that is based on the

content of the communication and the employee’s role.

▪ The “subject matter” test deems an employee's communication with

the corporation's attorney privileged if (i) the communication is made

at the direction of her superiors, and (ii) the subject matter of the

attorney's advice and the communication is the performance by the

employee of the employee's duties of her employment.

In re USA Waste Mgmt. Res., L.L.C., 387 S.W.3d 92, 96 (Tex. App.

2012).

13

Control Group v. Subject Matter Test

▪ Control Test: upholds the attorney-client privilege only

if the individual speaking to the attorney was vested by

the corporation with authority to seek legal advice and to

participate in the corporation's response to this advice.

▪ Subject-Matter Test: protects communications of

employees made at the direction of superiors in

the corporation to the corporation's attorneys regarding

the subject matter upon which the attorneys' advice is

sought and concerning the duties of employment.

14

Who Is the Lawyer?

▪ In-House Counsel?

▪ Outside Counsel?

15

In-House Counsel Communication

▪ It can often be difficult to determine which communications are privileged as

in-house counsel often gives a mixture of legal and business advice.

▪ Consider:

-Was the communication designed to meet

problems that are “predominantly legal?”

-Was in-house counsel engaging in activities

typically performed by attorneys?

-Does in-house counsel work in the

legal department or in a business group?

16

Once Privilege Attaches . . .

▪ It may be waived only by someone with appropriate

decision making authority:

• “[T]he power to waive the corporate attorney-

client privilege rests with the corporation's management and

is normally exercised by its officers and directors. The

managers, of course, must exercise the privilege in a manner

consistent with their fiduciary duty to act in the best interests

of the corporation and not of themselves as individuals.”

• Commodity Futures Trading Commission v. Weintraub, 471

U.S. 343, 348–49, 105 S.Ct. 1986, 85 L.Ed.2d 372

(1985) (footnote omitted).

17

What if the Corporation Has Affiliates?

▪ “[C]ommunications between employees of a subsidiary corporation and

counsel for the parent corporation, like communications between former

employees and corporate counsel, would be privileged if the employee

possesses information critical to the representation of the parent company

and the communications concern matters within the scope of employment.

Admiral Ins. Co. v. U.S. Dist. Court for Dist. of Arizona, 881 F.2d 1486,

1493 (9th Cir. 1989).

▪ Generally, the in-house counsel can advise an affiliate corporation without

undermining the attorney-client privilege.

18

What if the Corporation Has Affiliates?

▪ Bottom Line: Courts usually protect as privileged communications among

members of a corporate family.

▪ ABA Model Rule 1.13(a) explains that “[a] lawyer employed or retained by

an organization represents the organization acting through its duly authorized

constituents.”

▪ It is not automatic that a lawyer who represents a corporation, by virtue of

that representation alone, also necessarily represents affiliated corporations,

such as parents or subsidiaries.

▪ Whether that lawyer represents a client’s corporate affiliate depends on the

particular circumstances.

19

Factors Courts Weigh to Determine Whether an Attorney Represents Both a

Parent and a Subsidiary

▪ Most courts weigh multiple factors, focusing on the

operational commonality between the affiliated entities

and their financial and legal interdependence.

▪ Courts consider:

• The relationship between the parent and the subsidiary

corporation.

• The common interest that the parent and subsidiary may

share in the subject matter of the communication.

• Are they closely related?

• Do they share joint management?

• Do they share legal and financial interest?

20

How are the Entities Related?

▪ Wholly Owned Subsidiaries

• That a parent corporation and its wholly owned subsidiary

should be treated as a single entity for purposes of applying

the attorney-client privilege doctrine has found support in a

number of courts.

• However, even where a subsidiary is “wholly owned,” the

particular factors of the corporate relationship may demand a

different result with respect to attorney-client privilege.

▪ Corporations with less than a controlling share

• Other courts have lowered the standard of ownership to

majority owned or a controlling share; some are willing to

preserve the privilege to merely an affiliated corporation.

21

Focus on the Organizational Structure

▪ Where an organization appears to be composed of

multiple legal entities, a court may conclude that each

should have independent client status.

▪ In that case, each entity would need to establish its

privilege as would unrelated corporations.

22

United States v. AT&T, 86 F.R.D. 603 (D.D.C. 1979).

▪ Here the court ruled that for purposes of the privilege,

“client” included the named defendants and all wholly

owned subsidiaries as well as majority owned

subsidiaries, but minority owned subsidiaries and

formerly attached companies were not “clients” for

privilege purposes.

▪ Even still the privilege would apply when an attorney

provides legal advice or assistance to a non-client affiliate

if the advice or assistance is confidential among the

clients and relates to a matter in which the agencies have

a substantial identity of legal interest.

23

United States v. United Shoe Machinery Corp., 89 F. Supp. 357, 359 (D. Mass 1950)

▪ The court acknowledged that affiliation by ownership and

a common legal interest was enough to keep shared

communications protected by the privilege.

▪ The decision focused on whether the purpose of the

communications was legal and not business-oriented.

24

Is There a Joint Representation?

Attorney

Corporate Parent Subsidiary

25

Attorney

Corporate Parent Subsidiary

Attorney

Corporate Parent Subsidiary

Is There a Joint Representation?

▪ A joint representation can exist where the parent and

subsidiary use the same counsel.

▪ Communications between the joint clients and their

shared attorney are privileged against third parties.

▪ Neither joint client can unilaterally waive the privilege.

▪ Neither joint client may assert the privilege in a dispute

between themselves.

▪ If the parent decides to waive the privilege, it cannot do

so without the subsidiary’s agreement.

26

Joint Representation, continued

▪ If parents and subsidiary are not considered a single

client, the attorney can represent both as joint clients

without undermining attorney-client privilege.

▪ But, whether the two entities are jointly represented is a

fact-intensive inquiry.

▪ In the seminal case, In re Teleglobe Communications

Corp., the Third Circuit determined that since a parent

and its subsidiaries were separate corporate entities, they

should remain so for privilege purposes.

▪ Thus, counsel who represents both the parent and a

subsidiary may have two clients, not one.

27

In re Teleglobe Communications Corp., 493 F.3d 345 (3d Cir. 2007)

▪ In Teleglobe, a subsidiary declared bankruptcy and sought privileged

documents from its former parent.

▪ The 3rd Circuit rejected an automatic presumption that the attorney for

the parent entity jointly represented the subsidiary.

▪ “The majority-and more sensible-view is that even in the parent-

subsidiary context a joint representation only arises when common

attorneys are affirmatively doing legal work for both entities on a

matter of common interest.”

▪ On remand, the district court determined there was no joint

representation of the parent and the non-bankrupt affiliates.

28

Courts Finding Joint Representation

▪ An Illinois bankruptcy court noted that parents and subsidiaries need to

preserve their independent identities, finding that use of the same counsel for

the parent and subsidiary resembles a joint representation; consequently, one

party may not assert the privilege against the other. See In re Santa Fe Trail

Transp. Co., 121 B.R. 794 (Bankr. N.D. Ill. 1990).

▪ Where the parent corporation had never hired separate counsel for its

subsidiary until the date the subsidiary was sold to a new buyer, the only

attorneys that could have been representing the subsidiaries in the transaction

were the firms representing the parent and its fully owned subsidiary. See 625

Milwaukee, LLC v. Switch & Data Facilities Co., Case No. 06-C-0727, 2008

U.S. Dist. LEXIS 19943 (E.D. Wis. Feb. 29, 2008).

29

But Joint Representation Comes with Risks. . .

▪ Creating the attorney-client relationship with those other

entities also creates ethics implications that could become

critical if one of the jointly represented clients declares

bankruptcy or is sold to a hostile company, etc.

▪ A former client usually can access the lawyer’s

communications with the other jointly represented clients,

and may be able to disqualify the lawyer.

30

But lawyers may deliberately choose to represent

only a component of the institution…

▪ American Bar Ass'n Comm. on Prof. Ethics, Formal Opinion 95–390 at 1001:262

• “The best solution to the problems that may arise by reason of clients'

corporate affiliations is to have a clear understanding between lawyer and

client, at the very start of the representation, as to which entity or entities in

the corporate family are to be the lawyer's clients, or are to be so treated for

conflicts purposes.”

▪ Ass'n of the Bar of the City of New York Comm. on Prof'l and Judicial Ethics, Formal

Opinion 2007–3

• “[C]orporate-family conflicts may be averted by ... an engagement letter ...

that delineates which affiliates, if any, of a corporate client the law firm

represents....”

▪ Wolfram, 2 J. Inst. Study Legal Ethics at 364

• “[D]iscrete agreements between a lawyer and corporate-family client can

define the relationship in such a way as to limit ... the type of conflict

obligations that the lawyer is and is not undertaking.”

31

Joint-Representation v. Joint-Defense

▪ Joint-Representation:

• Ex: One lawyer representing multiple corporate entities.

▪ Joint-Defense (“common defense”):

• Ex: Entities each have their own attorney in the course of a

joint defense.

▪ To show that the communications were made in the course of a joint

defense effort, the party claiming the privilege must prove that the

parties agreed to pursue a joint strategy.

▪ Although the parties must have common legal interests that are not

completely adverse, there is no requirement that all the parties'

defenses be compatible in all respects.

32

Attorney-Client Privilege & Corporate Transactions

33

What Happens to the Privilege?

▪ Mergers of Corporate Entities

▪ Spinoffs of the Corporate Entities

▪ Dissolution of a Corporate Entity

▪ Litigation Between the Corporate Entities

34

Mergers of Corporate Entities

35

The Common Interest Doctrine

▪ Allows parties to share documents and communications

without waiving privilege.

▪ Applies where parties share a legal interest (as opposed to

a commercial interest).

▪ The parties do not need to have identical interests in all

respects.

36

CID Applied to Mergers

▪ The shared interest in the context of a merger needs to be

identical and legal, not solely commercial.

▪ The disclosure must be designed to further that legal

interest.

37

What Counts as a Common Interest?

▪ Most common examples of an adequate common interest:

anticipated litigation or a pending merger.

▪ Factors that courts consider:

• Timing of the disclosure of the privileged information:

Disclosure after signing a merger agreement is more likely

to be privileged. See, e.g., In re JP Morgan Chase & Co.

Securities Litigation, 2007 U.S. Dist. LEXIS 60095, at *15

(N.D. Ill. Aug. 13, 2007).

• Certainty of the transaction: Lack of a signed merger

agreement or the existence of multiple suitors weighs against

finding there has been no waiver. See, e.g., Nidec Corp. v.

Victor Co. of Japan, 249 F.R.D. 575 (N.D. Cal. 2007).

38

Two Approaches to CID and Mergers

▪ “New York” versus Delaware

39

“New York” Approach

▪ This is a strict approach.

▪ Litigation must be pending or reasonably anticipated. See

Ambac Assurance v. Countrywide Home Loans, 41 Misc.

3d 1213(A), 1213(A) (N.Y. Sup. Ct. 2013) (rev’d, 124

A.D.3d 129, 998 N.Y.S.2d 329 (2014)).

▪ Other New York cases continue to require pending or

anticipated litigation and the Court of Appeals has not

ruled.

40

Delaware’s Approach

▪ This approach is more flexible.

▪ Codified in Rule of Evidence 502(b)(3): Must have a

shared legal interest, but litigation does not have to be

pending or reasonably anticipated.

▪ Need an interest that is “so parallel and nonadverse that,

at least with respect to the transaction…[the parties] may

be regarded as acting as joint venturers.” 3Com Corp. v.

Diamond II Holdings Inc., 2010 Del. Ch. LEXIS 126, at

*32-33 (Del. Ch. May 31, 2010).

41

Federal Case Law

▪ A wide body of federal case law has grown up around this issue.

▪ The weight of authority seems to be in favor of the more flexible approach:

• FSP Stallion 1 LLC v. Luce, 2010 U.S. Dist. LEXIS 110617, at *57-58 (D. Nev. Sept. 30, 2010) (common-interest doctrine applies when parties are engaged in a common legal enterprise, even if actual litigation is not in progress).

• Nidec Corp. v. Victor Co., 249 F.R.D. 575, 578 (N.D. Cal. 2007) (“The protection of the privilege under the community of interest rationale, however, is not limited to joint litigation preparation efforts. It is applicable whenever parties with common interests join forces for the purpose of obtaining more effective legal assistance.”).

42

Does It Matter if the Merger is Never Consummated?

▪ Generally no.

▪ Hewlett-Packard, 115 FRD 308 (N.D. Cal 1987): The

contemplated transaction was abandoned, but the court

concluded that the parties reasonably anticipated joint

litigation and the CID applied because “at the time the

[privileged information] was shared, there was a real

possibility that [the buyer] would purchase [the entity].

43

After the Transaction, What Happens to the Privilege?

▪ Ordinarily the buyer acquires control of the privilege, but

some courts have held that privileged communications

relating to the transaction itself are retained by the seller.

▪ Great Hill: The surviving corporation of a merger under

DE law owns the privilege associated with all pre-merger

communications in the absence of language stating

otherwise in the merger agreement.

▪ Contrast with an asset purchase, where the selling

company remains an independent legal entity and retains

the privilege unless it is expressly transferred.

44

Scope of the Communications Covered by the Seller’s Retained Privilege

▪ In Tekni-Plex, Inc. v. Meyner & Landis, 674 N.E.2d 663

(N.Y. 1996), the court ruled that privileged

communications related to the merger transaction itself

are retained by the sellers, but rights with respect to other

attorney-client communications are transferred to the

buyer.

▪ For instance, if the target company’s law firm had

represented it prior to the merger transaction with respect

to other matters such as intellectual property, the buyer

would acquire all rights to all communications associated

with those issues, but would not acquire rights to

communications related to the merger transaction itself.

45

Spinoffs of Corporate Entities

46

The CID and a Divested Subsidiary

▪ A majority of courts have held that communications

between a parent and a subsidiary retain their privileged

nature even though the subsidiary is a discrete legal

entity.

▪ But, a lawyer who represents a corporation does not

automatically represent affiliated organizations.

47

Communications between Parents and Subsidiaries

▪ Inter corporate communications (between a parent and

subsidiary or two subsidiaries) can receive the same

protection as comparable intra corporate communications.

▪ Courts are less likely to retain the privilege where the

parent and subsidiary have separate legal representation

and appear adverse to each other. See Bowne of New

York City, Inc. v. AmBase Corp., 150 F.R.D. 465, 491

(S.D.N.Y. 1993).

48

Dissolution of Corporate Entities

49

Dissolved Company

▪ Corporate attorney client privilege ends once a company

ceases operations and no longer has someone to speak for

it.

▪ Red Vision Systems v. Nat’l Real Estate Information Servs., 108 A.3d 54 (Pa.

Super. Ct. 2015).

50

Insolvent Company

▪ Protections of privilege are not eliminated.

▪ But, in a bankruptcy proceeding, the authority to exercise

or waive the privilege may be transferred from the debtor

entity to another party.

▪ Commodity Futures Trading Commission v. Wintraub,

471 U.S. 343, 349 (1985).

51

Litigation Between the Entities

52

Litigation Between the Entities

▪ Where two related corporate entities find themselves

taking legally and commercially adverse positions with

respect to pending litigation at the time communications

are made to an attorney, courts would most likely decline

to extend the protection of the attorney-client privilege to

that communication.

▪ This could be the case even where the corporate entity is

a wholly-owned subsidiary.

▪ In re Napster, Inc. Copyright Litig., No. C 04-1351 MHP, 2005 WL

6569723, at *5 (N.D. Cal. Apr. 12, 2005).

53

Preventing Unwanted Outcomes in Transactional Work

54

Tips for Preserving Attorney-Client Privilege

▪ Clearly document the scope of the relationship and identify who and who is

not represented.

▪ Determine what privilege applies to communications.

▪ Limit distribution of legal advice to people who need to know.

▪ Do not refer to the substance of legal advice unless absolutely necessary.

▪ Establish a policy on copying and distributing documents containing legal

advice and opinion.

▪ Consider whether a document heading will be helpful and identify

documents that are privileged; but remember it will not be determinative.

55

Tips for Preserving Attorney-Client Privilege, continued.

▪ List the purpose of the communication and maintain

separate filling systems for legal and business advice.

▪ Identify senders or recipients of communications by name

and position.

▪ Restrict physical access to privileged documents.

▪ Cull and pull privileged documents before making

documents available to prospective buyers or similar

parties.

▪ Do not assume you can provide privileged information to

anyone within the corporate group.

56

Best Practices to Prevent Joint Representation

▪ Expressly disclaim any representation to any entities that the attorney does

not wish to represent, in writing if possible, and then make sure that the

attorney’s conduct is consistent with any disclaimers.

▪ End any attorney-client relationship clearly and unambiguously.

▪ Retain separate counsel for separate “clients” even if all counsel are paid for

by a common source, especially when interests may be adverse.

▪ If the parent and a subsidiary are jointly represented, be clear about the scope

before sharing information with counsel.

57

Best Practices Within a Merger

▪ A joint defense agreement or common interest agreement

may help preserve the common interest privilege if

entered into before privileged information is shared.

▪ Remember that communications made solely for

commercial or business interests may not be protected

under the common interest doctrine.

58

Best Practices (continued)

▪ Address the attorney-client privilege between the target

and its counsel in the definitive documents, particularly

where parties wish to deviate from the default privilege

ownership (see Great Hill).

▪ Ensure that the attorney-client privilege has been

maintained by sharing information only between counsel

for each entity. Client to client communications are not

likely to be protected.

59

Best Practices Upon Insolvency or Dissolution

▪ Insolvency

• As part of insolvency planning, management of the debtor

should be informed of and weigh the risks of the potential

loss of the privilege.

• Bankruptcy plans should expressly identify whether the

privilege will be conveyed to a non-debtor party, as well as

the scope and potential impact of such a transfer.

▪ Dissolution

• Corporations should not assume that the privilege will

survive the death of the corporation.

• If maintaining privilege is necessary post-dissolution, there

must be someone to speak for the entity to enforce the

privilege.

60

Questions?

Charles C. Lemley clemley@wileyrein.com

Richard A. Simpson

rsimpson@wileyrein.com

Nicole Audet Richardson nrichardson@wileyrein.com

61